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The pros and cons of a refund advance

Millions of people look forward to getting their income tax refund each year.  However, some people need it more desperately than others and should consider their options.

The popularity of refund advance products has grown in recent years since the IRS is now required by law to delay the refunds of early tax filers who claim the Earned Income Credit or the Additional Child Tax Credit until at least mid-February.  However, for some years, these refunds won’t be available until March.  This year they won’t be available until March.  The delay was designed to detect tax fraud.

The pros are simple since there is only one.  You may be entitled to get your refund faster if you are approved for the advance by the company.

The cons are the additional fees and the possible effect on your credit score.

There are two options to get your refund faster.

A refund anticipation loan (RAL) is a loan that many tax preparation companies provide.  A RAL is not automatically available for everyone.  Liens may be placed against the refund for back taxes, past-due student loans, and back child support.

If a lien has been filed against the refund, the RAL may be denied or only given the balance of the refund.  If you are getting a RAL, the interest rate can be very high.  Since these loans are short-term financing, they are not governed by the same laws for interest rates as are conventional loans.  A RAL can have very high-interest rates along with other additional fees.

Whenever you apply for a loan, the lender has the automatic right to check your credit.  This may affect your credit score, depending on whether it is a hard-inquiry or soft-inquiry.  If there is a hard inquiry, your credit score may be negatively affected.  If it’s just a soft-inquiry into your credit report, then your credit will not be affected.

One additional problem is that if your tax refund is less than expected, you could still owe the entire amount of the loan.

RALs have been substantially replaced by refund anticipation checks (RACs).  However, they are still available from private lenders.

A RAC is another option that some tax preparation companies provide.  Although RACs do not charge interest, you may end up paying a significant amount of your tax refund in unexpected fees.

Many fees can be added on for vague costs such as data and document storage or a technology fee.  These are commonly called junk fees.

The cost they quote could be much higher by the end of the process.

RACs and RALs are most appealing to people who need it the most urgently.  Unfortunately, they have a reputation for inflated fees and rates that take advantage of people who typically need their money the most.

David Zubler is a tax accountant and Enrolled Agent, the author of four books, and a philanthropist.  All of his proceeds from the books go to a charitable foundation he created for underprivileged children.  He is also the founder of Your Tax Care which provides tax education. David can be reached for questions and consultation at yourtaxcare.com.